Health Coverage Exclusion Cap

Currently, taxpayers who receive employer-sponsored health benefits are not taxed on the value of those benefits. A group of Republicans in Congress have recently proposed creating a cap on the current employee tax exclusion for employer-sponsored health insurance benefits. While the proposal did not contain a specified amount for the cap, a separate paper released by a conservative research firm called for capping the tax exclusion at 125 percent of the national average value of employer-sponsored health insurance plans.

We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about recent Congressional proposals to impose a cap on the value of employer-sponsored health coverage that can be excluded from taxable income.

Below is a summary of the debate that ensued between the two professors.

Their Votes:



Byrnes



Bloink

 

Their Reasons:

Byrnes: Capping the tax exclusion for employer-provided health insurance benefits is a tool that we can use to reign in the amount employers spend on health insurance benefits. Right now, employees are allowed to receive employer health insurance benefits with an unlimited tax exclusion. Health coverage costs are constantly increasing, and this type of cap is one way that we can motivate individuals to proactively minimize their healthcare spending—because they'd also be motivated to avoid additional taxes.

Bloink: The current system delivers an incredible amount of value for employees who have access to comprehensive health insurance via employer-sponsored plans on a 100% tax-free basis. We want to encourage robust employer health coverage options. This proposal is essentially a repackaging of the ACA Cadillac tax—a tax that was repeatedly delayed and ultimately repealed altogether because of concerns over the adverse tax impact it would have on the lowest-income taxpayers. There's no valid reason to resurrect this tax.

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Byrnes: By including the value of high dollar plans in employee income, employers and employees will be motivated to make more cost-effective decisions when it comes to choosing the types of health benefits that are offered and received. Those that do choose to offer more expensive plans aren't prohibited from doing so—the decision will just have to be one that is more fully considered from a cost-benefit perspective.

Bloink: Although the federal government may be losing tax revenue by allowing the full value of health benefits to go untaxed, encouraging employers to spend on health insurance for employees is actually benefiting the government in the long run. Without the exclusion, the government would inevitably end up picking up the tab through credits and other assistance. Ultimately, that would increase the cost of health coverage for the government and, thus, all taxpayers.

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Byrnes: Employers constantly shy away from offering comprehensive health coverage unless they're absolutely required by law to provide it to employees. By capping the exclusion and taxing the value of high dollar health coverage, we'll effectively be capping the amount employers can spend before employees also begin to feel the financial burden of that employer-sponsored health coverage. In the end, this would have the effect of reducing the cost of health coverage so that even the smallest employers would find the benefit cost-effective.

Bloink: This cap would ultimately end up increasing tax rates for the lowest income Americans who can ill afford the additional tax liability. We should be doing everything we can to encourage employers to offer generous tax benefits, not the other way around. This cap is a type of stealth tax on low-income Americans---and in the end, it's highly unlikely that it'll ever become a reality.